Aussies and tax time

Over the next few weeks a lot of you will be receiving tax refund cheques from the Taxation Office. The ATO has received 5,453,000 tax returns so far this tax year. So far they've processed 4,794,000 returns with 4,224,000 tax payers receiving a refund. So far the total refund figure is $9.76 billion, which means the average return (so far for 2012) is $2310.60. That’s not an insignificant amount.

A tax refund is not a lucky windfall. It is the government acknowledging that you overpaid. This money was withdrawn from your finances during the year and now it has to be reinserted. But how and where?

It’s not a bad question and one that depends on what life stage you’re going through. Here are some tips that, depending on your age, will help you put your return in the right place.

First Job/Tertiary student: put your return into debt reduction or into a high interest account. At this age most youngsters have their first credit card and if the balance on it is getting close to the max, a tax refund should be applied to it. If your credit card is looking okay, you should make this money earn more money, but you won’t want it locked away for the six months or a year that most bank term deposits operate on. There are high interest savings accounts that allow you to take out the money when you want but check the fine print: many will lure you with a high interest rate but the headline return will drop once your money has been in there for four to six months. If you want flexibility and a high return, make sure you are getting both.

House savers: if you are locked into saving a deposit for a house, a tax refund is best placed in your high interest savings account, so long as you don’t have significant credit card debt or a high interest car loan. For example, if you are paying 15 per cent for your cards, and only getting 5 per cent in your savings, perhaps use the tax refund to control your debt.

Mortgage payers: in most variable rate mortgage accounts, once you’ve been paying it for 18 months or more, you are starting to pay-down principle as well as interest. So paying lump sums into the mortgage can noticeably speed the pay-out timeline. Financial web sites, such as www.ybr.com.au, have calculators that show how much faster you pay the mortgage – and how much you save – by putting lump sums into it. But be warned: there’s no point doing this in most fixed-rate mortgages and many variable rate home loans won’t allow you to put in lump sums or pay-out early. So check your mortgage first.

Mortgage payers with kids: people with mortgage and kids have so many competing priorities for a windfall that there could be twenty places to put a tax refund cheque. A kids’ school fees, Christmas presents, mortgage, credit cards, electricity bill or the deposit on a much needed new car. For people in this situation, you already know where the money has to go. My advice is to not let it be absorbed into the general bank account: tag the money and make it work for you. And if you’re stressed and overworked, seriously consider putting that tax refund into a holiday.

Business owner: business owners have a choice how to spend their tax refunds. You can reinvest the money straight back into your business or use it to pay down personal credit card debt or mortgage balances (depending on where the refund accrues). Many business owners use tax refunds to catch up with their quarterly BAS payments or their year-end bill. Either way, a tax refund shouldn’t be squandered.

Pre-retirees: people in their fifties are generally still working and paying mortgages, but they are also preparing for retirement. A person in this phase of life could top up their superannuation, having first checked with an adviser about their benefits of doing this and what the latest rules are. Or, a tax cheque could be placed into a high interest bearing account, or could be used to buy some high-yielding shares (that at least deliver dividends). In your fifties, your mortgage might be within reach of being paid-out in which case, putting a tax refund cheque into the mortgage is a good bet.

Retiree: in retirement investors are generally looking for very stable, high yield places to put their money. If you are retired – and also lucky enough to have a tax refund – make sure your electricity bill is under control and then have a look at tucking some of the cash away in a high interest account. There’s no point in banking this cheque in your bank transaction account – you’ll be receiving either a zero interest, or an interest rate so low that the monthly account fees wipe it out. Once you’re in retirement, you are exposed to inflation risk – the risk that inflation reduces the value of your savings faster than your yield can enhance the value. So research a place to put your windfalls – look for high yields, high stability and good access to your funds.

A picture analysis of Australia’s tax payers breaks down who is paying the most.